Cattle Fundamentals Overwhelm Global Finance Worries

If you ever wondered how solid current cattle fundamentals are, ponder last week’s bullishness in the face of world financial markets that tottered precariously upon the apparent razor’s edge separating Europe from recovery and ruin.

May 11, 2010

If you ever wondered how solid current cattle fundamentals are, ponder last week’s bullishness in the face of world financial markets that tottered precariously upon the apparent razor’s edge separating Europe from recovery and ruin.

By now you know that Wall Street plunged last week. The 1,000-point freefall of the Dow Jones Average (DJA) Thursday – before ending the day down 348 points – may have been due at least in part to automated stop-loss computer programs feeding upon themselves. But the reason stock prices fell to begin with was continued worry that Greece would default on its debt and be unable to secure additional financing to avoid bankruptcy.

The value of the dollar (ICE-DX) spiked to its highest level in more than a year as the EURO fell to 14-month lows. Friday’s DJA was down 628 points from the previous Friday.

Even so, the CME Feeder Cattle Index remained near $113 and live-cattle futures lost little ground overall, thanks to near-record beef cutout values. And, that’s due in part to growing consumer confidence seen in improved food service sales.

The National Restaurant Association’s (NRA) most recent Restaurant Performance Index (RPI) issued last week was at its highest level since September 2007.

“The RPI’s solid performance in March was driven by improvements among both the current situation and forward-looking indicators,” says Hudson Riehle, NRA senior vice president. “Restaurant operators reported net gains in both same-store sales and customer traffic in March, the first time in 31 months that both indicators stood in positive territory.

“In addition, restaurant operators are increasingly optimistic about growth in sales and staffing levels in the months ahead, while their outlook for the economy soared to its strongest level in five years,” he says.

Cash fed cattle gained $1-$2 last week, as calves and feeders continued to sell near record highs (see “Higher Prices Attracting Cattle Earlier”).

Derrell Peel, Oklahoma State University Extension livestock marketing specialist, said Friday: “The rally in cattle prices so far this spring has largely been a surprise… a pleasant surprise in most cases. The result has been considerable optimism among cattle producers tempered with some very prudent caution.”

In addition to faltering European finances, there’s the Gulf oil spill that could disrupt grain shipments, as well as the U.S. economy’s own fragile nascent recovery. Closer to home, higher wholesale beef costs are yet to be reflected in the retail meat case. When they do show up, the industry will find out how much of the recent upswing stems from increased beef demand and how much from recent food price inflation.

Peel says that while higher prices imply higher revenue, that’s only half of the profit equation. “Feed, fuel, fertilizer and other input prices will likely be pressured upward as a more robust recovery takes hold,” he adds.

Over the weekend, members of the European Union hammered out details in a $1-trillion package aimed at providing a safety net for Greece and other financially challenged EU nations.